What Happens When You Make Minimum Payments on Credit Cards?

Making the minimum monthly payments on your credit cards can lead to maximum pain. By paying only the lowest amount required each month, you’re stretching out how long it takes to wipe out your credit card debt and paying considerably more interest than you otherwise would.

A minimum payment can be a short-term approach to dealing with financial troubles and, by itself, a minimum payment won’t hurt your credit score because you’re not missing a payment. Nonetheless, experts strongly suggest making more than the minimum payment each month to avoid digging yourself into a financial hole.

Courtney Nagle, a spokeswoman for the National Foundation for Credit Counseling, says, “Limiting repayment of your debt to minimum monthly installments is a costly way to manage debt and is not a recommended long-term solution.” She recommends paying it off as quickly as you can to save money and give your budget “a little breathing room.”

How Minimum Payments Are Calculated

Nagle explains that minimum monthly payments for credit cards are calculated in one of two ways, using either a flat percentage or a formula.

Flat percentage. Some credit card issuers, including most credit unions and subprime lenders (those offering credit cards to customers with poor credit histories), use a flat percentage to figure out the minimum monthly payment for your credit card, according to Nagle.

In this case, the minimum payment is based on the total balance on a cardholder’s monthly bill, including finance charges and any fees, Nagle says. Credit unions typically set the minimum payment at 2 percent of the total balance, she says, citing a 2015 Consumer Financial Protection Bureau report. Subprime lenders are more likely to require a minimum payment equaling 5 percent to 7 percent of the total balance.

Taking that into account, if your total balance for a credit card is $3,000 and the flat percentage is 2 percent, your minimum monthly payment would be $60.

[Read: The Best Low-Interest Credit Cards of 2018.]

However, that same $3,000 balance on a credit card with a 5 to 7 percent flat percentage would result in a minimum monthly payment ranging from $150 to $210.

Formula. Some major issuers of credit cards calculate minimum payments using a formula. They add up the minimum payment based on a percent of your total balance, excluding interest and fees, she says. They then add the interest and any fees to the minimum balance due.

For example, Nagle explains, a balance of $1,250 at a 16 percent interest rate would carry a minimum payment of $29.17 if the minimum payment percentage formula is 1. The 1 percent equals $12.50 and the interest equals $16.67 (without fees), which totals $29.17.

Usually, a minimum monthly payment is at least $15, no matter how your balance is calculated, says Ed Mierzwinski, senior director of the Federal Consumer Program at the U.S. Public Interest Research Groups, or PIRG, a nonprofit advocacy group.

A payment as low as $15 “can make the minimum seem like an attractive option for cash-strapped consumers,” according to research published in 2014 by the Penn Wharton Public Policy Initiative at the University of Pennsylvania.

How Interest Grows When You Make Minimum Payments

Because of the interest charged by a credit card issuer, your debt easily can go from a hill to a mountain if you make only the minimum payment each month. That’s because as long as you carry a balance, the credit card company will keep charging interest on the balance.

The following table shows just how much of a difference there is between making a minimum payment and making more than the minimum payment. For this illustration, let’s say the minimum payment is 2 percent of the unpaid balance, the interest rate is 18.9 percent, and no new purchases are added to the card.

Balance Interest rate Monthly payment Payoff period Total paid
$5,000 18.9% $100 (2% of total balance) 30+ years $19,564.30
$5,000 18.9% $200 (4% of total balance) 11.4 years $8,109.16
$5,000 18.9% $600 (12% of total balance) 3.5 years $5,746.56
$5,000 18.9% $5,000 (100% of total balance) Zero years $5,000.00

Kevin Gallegos, senior vice president of new client enrollment at Freedom Debt Relief, a debt settlement company, urges cardholders to pay attention to the “Minimum Payment Warning” section of their credit card bills. This section includes a table showing how much money and how many years it will take to erase your balance if you pay only the minimum amount each month. This warning is required by the federal Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act.

How Minimum Payments Affect Your Credit Score

When made on time, minimum monthly payments can help you maintain a good credit score, Nagle says. Your payment history — which includes paying your bills on or before the due date — makes up 35 percent of your FICO score. FICO is the major provider of credit scores in the U.S. Another benefit: Making at least the minimum payment lets you avoid late fees and other penalties.

[Read: The Best Credit Cards for Bad Credit of 2018.]

On the flip side, making minimum payments can indirectly harm your credit score, according to Thomas Nitzsche, a credit educator at Money Management International, a nonprofit that provides financial counseling and education. He says that’s because cardholders who make only minimum payments may have maxed out, or nearly maxed out, their credit limits, causing their credit utilization to climb too high.

Credit utilization, which accounts for 30 percent of your FICO score, measures the amount of credit available versus the amount of credit used.

Whether you’re making minimum payments or not, you should aim to keep your credit card balances at or below 30 percent of your credit limits. For instance, if the credit limits for all of your cards total $6,000, your balances should be at or below $1,800.

“Credit card utilization can be very influential to your credit score,” Gallegos says. “So you want to keep your credit card balances and utilization low; high credit card balances can negatively impact the score.”

Is It Ever Ok to Make Just a Minimum Payment?

According to Nagle, it might make sense to make an on-time minimum payment “when your budget is stretched thin in order to keep your score from tanking.”

Chad Rixse, financial planner and co-founder of Millennial Wealth, a financial planning firm for millennials, says, “In the long run, (minimum payments) make it very difficult to make any real progress on paying off the balance.” It could make it feel like a never-ending cycle, he says, since the minimum payment might barely wipe out the last month’s interest.

As a one-time occurrence during a temporary financial hardship or if your credit card has a temporary promotional interest rate of zero percent, Nitzsche says it’s alright to make a minimum payment. But if minimum payments are happening regularly, “then it can become an issue,” he says.

Jeffrey Arevalo, a financial wellness expert at GreenPath Financial Wellness, a nonprofit that provides financial counseling, says, “Even paying just $10 more than the minimum each month will help pay down the balance much faster.”

How to Avoid The Minimum Payment Pitfall

If you find yourself consistently making minimum payments on your credit cards, there are steps you can take to get over that hump.

Create a household budget. A household budget — whether it’s on paper, in a spreadsheet or on an app — can keep your personal finances on track, including your credit card debt.

Cut expenses. Nagle recommends canceling your cable TV service, freezing your gym membership or reducing the number of times you eat at restaurants as some of the actions you can take to “drastically improve your debt repayment strategy.”

Contact your credit card issuers. If you’re suffering a legitimate financial hardship — you lost your job, for example — Nitzsche recommends reaching out to your credit card companies to see whether they’ll reduce your interest rates, enabling you to decrease the cost of paying off your debts.

Look into a balance transfer. Switching a higher-interest balance to a no- or lower-interest credit card can save money, since the interest you’ll be paying will be reduced or eliminated during the promotional period. Keep in mind, though, that most balance transfer offers come with a fee (typically a percentage of the transferred balance).

[Read: The Best Balance Transfer Credit Cards of 2018.]

Pay off balances in full. This may take a while to accomplish, but you should aim to eventually pay off credit card balances in full every month. If you do that, you’ll avoid paying hefty amounts of interest — and potentially save thousands of dollars in the long run. To get to that point, you can try one of these repayment methods.

Avalanche method. Using this method, you focus on making the biggest payments on the card card with the highest interest rate while still making minimum payments on your other cards. You repeat this process until you’ve cleared all of your credit card debt.

Snowball method. This method focuses on making the biggest payments on the lowest balance while making minimum payments on the other balances. Once you’ve paid off the lowest balance, you work your way toward the next-highest balance and so forth, building momentum. The ultimate goal is to knock out the highest balance after you’ve conquered all of the lower balances.

Get help from a credit counselor. If you end up in a financial bind — in other words, you just can’t seem to make more than the minimum payments each month — it might be time to visit a credit counselor. A credit counselor will review your finances and come up with a plan to better manage your debt.

Avoiding a Vicious Cycle

Making minimum credit card payments is OK every once in awhile but it shouldn’t become routine. Regularly making minimum credit card payments can wind up costing you thousands of dollars in interest as you’re struggling to pay off the balances over what could be a decade or more.

More from U.S. News

What to Do After Being Denied for a Credit Card

When Does My Credit Card Report to the Credit Bureaus?

How to Earn Rewards When You Have Bad Credit

What Happens When You Make Minimum Payments on Credit Cards? originally appeared on usnews.com

Correction 11/09/18: